PHILIP A. BRIMMER, District Judge.
This matter is before the Court on plaintiff's motion for preliminary injunction [Docket No. 45] and defendants' motion to dismiss, to transfer venue, or, in the alternative, to stay the proceedings [Docket No. 43]. On April 1, 2010, defendants filed their motion to dismiss, transfer, or stay the action. On April 6, plaintiff filed its motion for preliminary injunction regarding the in-term covenant not to compete [Docket No. 45]. The motions are fully briefed, and the Court held a joint hearing on those motions on June 17, 2010. Thereafter, the parties filed supplemental briefs [Docket Nos. 80, 81]. The motions are ripe for disposition.
Plaintiff Big O Tires, LLC ("Big O") "is a retail tire franchisor with approximately 500 independently-owned and operated locations in twenty states, each doing business as `Big O Tires,' selling tires, wheels, shock absorbers, and other automotive goods and services." O'Neil Decl. [Docket No. 45-2] at 1, ¶ 2. Plaintiff's Western Division Vice President Richard S. O'Neil declares that the "relationship between Big O and each of the franchised locations is governed by franchise agreements that allow the franchisees, for a term of years, to use Big O's marks, trade dress, and licensed methods in exchange for, among other things, payment of royalties." O'Neil Decl. [Docket No. 45-2] at 1-2, ¶ 2.
On June 30, 1999, defendant Felix Bros., Inc. entered into a Big O franchise agreement ("Quartz Hill Agreement") and opened a Big O franchise in Quartz Hill, California. See Docket No. 1-1 at 8. Defendants Ralph, Armida, Angel, and Maria Felix were all parties to the Quartz Hill Agreement. Ralph and Armida Felix own 70% of defendant Felix Bros., with Angel Felix owning the remaining 30%. See Docket 1-1 at 47. On April 25, 2001, Manzano, Inc. became a Big O franchise in Palmdale, California ("Palmdale Agreement"). See Docket No. 1-3 at 8. Ralph Felix owns 51% of Manzano. See Docket No. 1-3 at 43. Ralph and Armida Felix, as guarantors of Manzano, signed the Palmdale Agreement and agreed not to compete with Big O during the term of the Palmdale Agreement ("in-term covenant not to compete"). See Docket No. 1-3 at 26.
On August 23, 2001, Felix Tires, Inc., with Ralph and Armida Felix as guarantors, became a Big O franchise in Lancaster, California ("Lancaster Agreement"). See Docket No. 1-2 at 4. Pursuant to the Lancaster Agreement, Ralph and Armida Felix agreed, as guarantors of Felix Tires, agreed not to compete with Big O during the term of the Lancaster Agreement. See Docket No. 1-2 at 27. Ralph and Armida each own 50% of Felix Tires. See Docket No. 1-2 at 45.
In January 2010, Mr. Felix "began the process of de-identifying [his] Quartz Hill tire store from all Big O brand names and trademarks ...." Docket No. 52-2 ("Felix Decl.") at 2, ¶ 5. He registered the Quartz Hill store under the name Budget Tires and Automotive. See id. On February 19, 2010, Big O filed this lawsuit and, on February 23, 2010, filed a motion for temporary restraining order and preliminary injunction [Docket No. 9],
The Quartz Hill Agreement contains a "Post Termination Covenant Not to Compete," which provides that
The in-term covenant not to compete in the Palmdale and Lancaster Agreements reads as follows:
Ex. 2 to Compl. [Docket No. 1] at 19, § 17.01; Ex. 3 at 18, § 17.01.
In addition to its argument that defendants are violating the in-term covenant not to compete simply by operating Budget Tires and Automotive at the Quartz Hill location, Big O contends that defendants are diverting customers from their Big O stores in Palmdale and Lancaster to the Quartz Hill location. Although one Big O witness testified about an affidavit from a Big O employee who made pretext calls to the Lancaster and Palmdale stores to determine whether the employees there would refer a supposed customer to Budget Tires and Automotive, that affidavit was not introduced at the hearing. The only evidence of diversion came from Mr. Edgar Aguilar, an employee at the Palmdale Big O location, who testified regarding a phone call he received from an individual claiming to be stranded with a flat tire in Quartz Hill. Mr. Aguilar estimated that the distance between the Quartz Hill location and the Palmdale Big O franchise was approximately 15 miles.
At the June 17 hearing on Big O's motion for preliminary injunction, Mr. Ralph Felix testified telephonically that he has no incentive to reduce his efforts to sell products at the Palmdale and Lancaster stores. Mr. Felix testified that he is working seven days each week exclusively at the Palmdale and Lancaster locations and emphasized that each "store needs to meet their numbers and they need to increase sales."
Defendants request that, prior to resolving the motion for preliminary injunction, the Court transfer venue pursuant to 28 U.S.C. § 1406(a) or stay the proceedings in light of ongoing litigation in state court in California [Docket No. 43]. The Court will address the motion to transfer venue and the motion to stay separately.
Defendants contend that venue in this Court is improper, invoking 28 U.S.C. §§ 1391 and 1406 and Federal Rule of Civil Procedure 12(b)(3). Generally, the question of whether venue is proper in a particular judicial district is determined by reference to the requirements of the relevant venue statute. See 14D Charles Wright, Arthur Miller & Edward Cooper, Federal Practice and Procedure § 3804 (2009). Big O's action raises federal claims and, therefore, implicates the venue provisions of 28 U.S.C. § 1391(b), which provides that
Section 1406(a) of Title 28 provides that the "district court of a district in which is filed a case laying venue in the wrong division or district shall dismiss, or if it be in the interest of justice, transfer such case to any district or division in which it could have been brought." See Fed. R.Civ.P. 12(b)(3) ("[A] party may assert the following defenses by motion: ... improper venue."). Because there is no allegation that any defendant resides, or may be found, in this district, defendants argue that venue is improper in this district because a "substantial part of the events or omissions giving rise to the claim" did not occur in the district nor is "a substantial part of property that is the subject of the action ... situated" in the district.
The Agreements at issue, however, contain a "Governing Law" clause which states that the parties "consent to ... venue in Denver, Colorado." See Verified Compl. [Docket No. 1] ("Compl."), ex. 2, § 29.01. Defendants believe that the clause is insufficient to establish this district court as a proper venue for this action, arguing that the clause is only permissive and that, in this circuit, forum and venue clauses with permissive language are not enforced. See Docket No. 43 at 6-7 (citing K & V Scientific Co., Inc. v. Bayerische Motoren Werke Aktiengesellschaft, 314 F.3d 494, 499 (10th Cir.2002); Excell, Inc. v. Sterling Boiler & Mechanical, Inc., 106 F.3d 318, 321 (10th Cir.1997)).
However, defendants misunderstand the relevance of the case law they cite. The cases proffered by defendants, as well as others on the subject of mandatory versus
Section 29.01 of both the Lancaster and Palmdale Agreements contemplates that the Federal District Court in Denver, Colorado qualifies generally as a permissible venue. The clause in question—providing that the parties "consent to ... venue in Denver, Colorado"—is one of "geographic" rather than "sovereign" distinction. See Am. Soda, LLP v. U.S. Filter Wastewater Group, 428 F.3d 921, 925-26 (10th Cir. 2005). As a consequence, this Court, located in Denver, Colorado, is a permissible venue to which defendants consented through § 29.01. In spite of this, defendants argue that a combination of choice-of-law doctrines and California law operate to invalidate the language of § 29.01. Defendants believe that this outcome is commanded by California Business and Professions Code § 20040.5, which states that "[a] provision in a franchise agreement restricting venue to a forum outside this state is void with respect to any claim arising under or relating to a franchise agreement involving a franchise business operating within this state." Cal. Bus. & Prof.Code § 20040.5 (West 2009).
Even if California law governed this case, § 20040.5 does not address the present situation. According to its very terms, § 20040.5 applies to provisions that restrict venue to a forum outside of California, not to provisions that permit or consent to outside forums. In other words, by its plain meaning, § 20040.5's prohibition against "provision[s] in a franchise agreement restricting venue to a forum outside this state" only addresses provisions that would prevent litigation from being brought within California. Section § 29.01 of the franchise agreement at issue in this case does not act as such a bar. Rather, as discussed below, it only serves as a prospective consent to venue—that is, waiver of the right to challenge improper venue—in a Court located in Denver, Colorado.
There do not appear to be any cases that have dealt with the particular issue of § 20040.5's application to provisions which consent to venue in a court outside of California. The Court need not decide the more difficult question of whether the California legislature has the authority to prohibit such consent-to-venue clauses, for that does not appear to be its intent in passing § 20040.5. Rather, "[b]y voiding any clause in a franchise agreement limiting venue to a non-California forum for claims arising under or relating to a franchise located in the state, § 20040.5 ensures that California franchisees may litigate disputes regarding their franchise agreement in California courts." Jones v. GNC Franchising, Inc., 211 F.3d 495, 498 (9th Cir.2000) (explaining that legislative
The Lancaster and Palmdale Agreements also provide that "the parties consent to the exclusive jurisdiction of either Colorado state courts or the United States Federal District Court for the District of Colorado for any litigation relating to this Agreement or the operation of the Franchised Business thereunder." See Docket No. 1-2 at 39, § 29.02. Even assuming this provision constitutes a mandatory forum selection clause, it does not render this district an improper venue. See K & V Scientific, 314 F.3d at 499 ("Generally speaking, the circuits that have addressed the issue are in agreement that `... where only jurisdiction is specified [in a forum selection clause], the clause will generally not be enforced unless there is some further language indicating the parties' intent to make venue exclusive.'"). Even if § 20040.5 were to apply and render § 29.02 of the Agreement void,
The provisions upon which defendants base the present motion all involve the propriety of venue. The general venue statute, § 1391, indicates where venue is proper. Rule 12(b)(3) allows dismissal when the venue requirements of § 1391 have not been met, in other words, when venue is improper. And § 1406 permits a district court which lacks proper venue to transfer, rather than dismiss, the case to a district where venue is proper. Of critical importance in this case is the proposition that "[i]mproper venue is of course a defense personal to a party and may be waived." Thompson v. United States, 312 F.2d 516, 519 (10th Cir.1962) (citing Freeman v. Bee Mach Co., 319 U.S. 448, 63 S.Ct. 1146, 87 L.Ed. 1509 (1943)). Moreover, "[i]t is well settled that venue provisions are subject to contractual waiver." United States ex rel. B & D Mechanical Contractors, Inc. v. St. Paul Mercury Ins. Co., 70 F.3d 1115, 1117 (10th Cir.1995) (citing National Equip. Rental, Ltd. v. Szukhent, 375 U.S. 311, 315, 84 S.Ct. 411, 11 L.Ed.2d 354 (1964)). In the present case, the consent-to-venue clause in § 29.01 of the franchise agreement acts as a prospective contractual waiver of defendants'
Defendants argue that, if venue is found to be permissible, the Court should stay the action because of an ongoing action filed by certain of the defendants and others against plaintiff in California state court. Although there are overlapping issues in the two actions, defendants have not argued that plaintiff's claims in this case constitute compulsory counterclaims in the state court action. See Align Technology, Inc. v. Bao Tran, 179 Cal.App.4th 949, 959-960, 102 Cal.Rptr.3d 343 (Cal. App. 6 Dist.2009) (summarizing what constitutes a compulsory counterclaim under California law). Defendants have not identified any mandatory basis for a stay of this action at this time. Therefore, the Court will deny defendants' request to stay this action prior to resolution of the motion for preliminary injunction because, if Big O is able to establish that it is suffering irreparable harm, a stay would permit that harm to continue.
In order to obtain a preliminary injunction, the moving party bears the burden of establishing that four factors weigh in its favor: (1) a likelihood of success on the
"[T]he limited purpose of a preliminary injunction is merely to preserve the relative positions of the parties until a trial on the merits can be held." See Schrier v. University of Colorado, 427 F.3d 1253, 1258 (10th Cir.2005) (quoting University of Texas v. Camenisch, 451 U.S. 390, 395, 101 S.Ct. 1830, 68 L.Ed.2d 175 (1981)) (internal quotation marks omitted). As such, there are three types of particularly disfavored preliminary injunctions: (1) preliminary injunctions that alter the status quo; (2) mandatory preliminary injunctions; and (3) preliminary injunctions that afford the movant all the relief that it could recover at the conclusion of a full trial on the merits. Westar Energy, Inc. v. Lake, 552 F.3d 1215, 1224 (10th Cir.2009) (citing O Centro Espirita Beneficiente Uniao Do Vegetal v. Ashcroft, 389 F.3d 973, 975 (10th Cir.2004) (en banc), aff'd on other grounds, 546 U.S. 418, 126 S.Ct. 1211, 163 L.Ed.2d 1017 (2006)). Before a court grants relief under one of these three types of preliminary injunctions, a movant seeking such an injunction must make a heightened showing of the four factors. RoDa Drilling, 552 F.3d at 1209; O Centro Espirita Beneficiente Uniao Do Vegetal v. Ashcroft, 342 F.3d 1170, 1177 (10th Cir.2003). Defendants do not argue that any of these types of disfavored preliminary injunctions are implicated in this case.
The Court also notes that the Tenth Circuit has stated that, "where the moving party has established the three `harm' factors tip decidedly in its favor, the `probability of success requirement' is somewhat relaxed." Heideman v. South Salt Lake City, 348 F.3d 1182, 1189 (10th Cir.2003) (emphasis in original) (citing Prairie Band of Potawatomi Indians v. Pierce, 253 F.3d 1234, 1246 (10th Cir. 2001)). To establish likelihood of success
In Winter, however, the Supreme Court held that a more lenient irreparable harm standard in cases where a plaintiff has shown a "strong likelihood of prevailing on the merits" is "inconsistent with [its] characterization of injunctive relief as an extraordinary remedy that may only be awarded upon a clear showing that the plaintiff is entitled to such relief." 129 S.Ct. at 375-76. The Court did not address whether a "somewhat relaxed" likelihood of success standard is permissible when the harm factors weigh decidedly in movant's favor. However, "[o]n its face, Winter appears to require a `likel[ihood]' of success on the merits." Incantalupo v. Lawrence Union Free School Dist. No. 15, 652 F.Supp.2d 314, 322 (E.D.N.Y.2009); see International Business Machines Corp. v. Johnson, 629 F.Supp.2d 321, 334-35 (S.D.N.Y.2009) ("The Court pauses to note that at least one authority has read the Supreme Court's recent decision in Winter [ ] as casting doubt on Second Circuit case law allowing parties who cannot show a likelihood of success to obtain an injunction if they show that there are `questions so serious, substantial, difficult, and doubtful as to make them fair ground for litigation.'") (citing 13 James Wm. Moore et al., Moore's Federal Practice § 65.22[5][c] (3d ed.2009)). "Notwithstanding the Supreme Court's decision in Winter ... the Second Circuit has continued to allow parties to obtain a preliminary injunction either through: (1) `a likelihood of success on the merits'; or (2) `sufficiently serious questions going to the merits to make them a fair ground for litigation and a balance of hardships tipping decidedly in the movant's favor.'" Incantalupo, 652 F.Supp.2d at 322 (citations omitted). The Tenth Circuit, which derived its modified likelihood of success approach from the Second Circuit, has also cited Winter without addressing its potential impact on the modified approach. See RoDa Drilling Co. v. Siegal, 552 F.3d 1203, 1209, n. 3 (10th Cir.2009); San Luis Valley Ecosystem Council v. U.S. Fish and Wildlife Service, 657 F.Supp.2d 1233 (D.Colo.2009) ("[T]he Tenth Circuit appears to recognize the continuing validity of the modified success-on-the-merits formula notwithstanding the Winter decision.") (citing RoDa Drilling). In this case, however, I need not determine whether the Tenth Circuit's "modified" approach has been called into question by Winter, as plaintiff has not shown that the harm elements tip in its favor.
The Colorado Court of Appeals has stated that
DBA Enterprises, Inc. v. Findlay, 923 P.2d 298, 302 (Colo.App.1996); American Indus. Leasing Co. v. Costello, 160 Colo. 588, 418 P.2d 881, 886-87 (1966) ("It has been recognized in an injunctive action involving non-competition in the sale of a business, that where one party's wrongful conduct has rendered difficult the assessment of damages, he cannot escape liability simply because it has become difficult to measure the damage with exactness.") (citing
The Court will apply "federal standards applicable to preliminary injunctive relief" pursuant to Federal Rule of Civil Procedure 65. Lyons v. Jefferson Bank & Trust, 781 F.Supp. 1525, 1530 (D.Colo. 1992) (citing Equifax Services, Inc. v. Hitz, 905 F.2d 1355, 1361 (10th Cir.1990)); see Viad Corp. v. Cordial, 299 F.Supp.2d 466 (W.D.Pa.2003) ("Although Viad's request for injunctive relief is based on a state law cause of action, viz., breach of restrictive covenants ancillary to the sale of a business, federal law governs whether an injunction is appropriate ....") (citing Instant Air Freight Co. v. C.F. Air Freight, Inc., 882 F.2d 797, 800 (3d Cir.1989)); see also Southern Milk Sales, Inc. v. Martin, T.C. Jacoby & Co., 924 F.2d 98, 103 (6th Cir.1991); cf. 19 Charles Wright, Arthur Miller & Edward Cooper, Federal Practice and Procedure § 4513 (2009) (noting that federal standards apply to preliminary injunctions and temporary restraining orders because they are "neither final determinations of the parties' rights nor final relief" in contrast to permanent injunctions which "involve entirely different considerations, and in general may be granted in a diversity case only if authorized by the relevant state law"). Even if application of federal standards were to lead to a different result than Colorado law, the Court would apply federal preliminary injunction standards. See Ferrero v. Associated Materials Inc., 923 F.2d 1441, 1448 (11th Cir. 1991) (holding that Fed.R.Civ.P. 65 is a procedural rule and applying it in a case arising out of a covenant not to compete where the state "law presume[d] that injunctions are appropriate remedies and that they should issue except in limited cases").
Here, Big O requests a preliminary injunction and, therefore, unlike a final determination on the covenant at issue here, "[a]n injunction is a matter of equitable discretion; it does not follow from success on the merits as a matter of course." Winter, 129 S.Ct. at 377-78. At this preliminary stage, and in light of recent clear guidance from the Supreme Court, plaintiff must "establish that [it] is likely to suffer irreparable harm in the absence of preliminary relief." Winter, 129 S.Ct. at 374; id. at 375-76 (emphasis added). "Issuing a preliminary injunction based only on a possibility of irreparable harm is inconsistent with our characterization of injunctive relief as an extraordinary remedy that may only be awarded upon a clear showing that the plaintiff is entitled to such relief." Id. at 381. The "`possibility standard' is too lenient." Id. at 375. The result in this case, however, is not dependent on which standard is applied. For the reasons discussed below, when applying "federal standards" to the preliminary injunction elements, the Court concludes
Big O relies on the "generally accepted position that breach of an exclusivity clause almost always warrants an award of injunctive relief." Dominion Video Satellite, 356 F.3d at 1262; see Pl.'s Reply Br. [Docket No. 54] at 8. That reliance, however, ignores the fact that "[d]espite the general acknowledgment that irreparable harm often arises from the breach of this type of agreement, courts do not automatically, nor as a matter of course, reach this conclusion. Rather, they examine whether the harms alleged by the party seeking the preliminary injunction are in fact irreparable." Id. at 1263.
Big O claims that defendants have violated the Lancaster and Palmdale Agreements by diverting customers to Budget Tires in Quartz Hill, but failed to offer any proof of such diversion. Edgar Aguilar, who works at the Big O franchise in Palmdale, admitted that he referred one caller (apparently a phony call from a Big O employee) to Budget Tires in Quartz Hill, but only because the caller stated that he was from out of town and was stranded in Quartz Hill with a flat tire. Rather than showing an intent to improperly divert business to Budget Tires, this isolated incident simply shows good judgment and a sense of decency on Mr. Aguilar's part. Although there were other calls of this sort to the Lancaster and Palmdale stores, there was no evidence of any referrals to any stores other than Big O stores. Mr. Felix testified that he specifically instructed his employees at the Lancaster and Palmdale locations not to divert any customers away from the Big O franchises.
Plaintiff argues that Mr. Felix, as a franchisee, has access to information regarding Big O's marketing strategy, including planned promotions. Again, however, Big O has not identified any evidence that Mr. Felix is using such information at the Quartz Hill location to gain a competitive advantage, and Mr. Felix testified that he has held no promotions or sales at the Quartz Hill location since the termination of his franchise agreement.
Big O offered the expert testimony of Dr. Russell Mangum in support of its argument that enforcement of the covenant not to compete would have no discernible impact on competition in the relevant market for services that Big O stores provide.
Big O also argues that enforcement of the in-term covenant not to compete protects "the integrity of the Big O franchise system," see Docket No. 80 at 3, because, by violating the covenant not to compete, defendants are able to "`spy' on Big O's proprietary information ... to use to his advantage at Quartz Hill." Docket No. 45 at 13. Big O contends that "[s]uch a situation strikes at the heart of the Big O system, citing, inter alia, the reasoning of Bad Ass Coffee Company of Hawaii, Inc. v. JH Nterprises, LLC, 636 F.Supp.2d 1237, 1249 (D.Utah 2009) ("BACH"), and Quizno's Corp. v. Kampendahl, No. 01 C 6433, 2002 WL 1012997, at *7 (N.D.Ill. May 20, 2002). Those cases, however, involved post-termination covenants not to compete in situations where the franchise agreements were terminated early. One of the reasons those courts enforced the post-termination covenants was that the provisions provided an important disincentive to other franchisees who might seek to disregard their contractual obligations. See Quizno's, 2002 WL 1012997, at *7 ("Kampendahl's willful violation of the Agreement sends a message to other franchisees that the Agreement does not protect Quizno's and may be disregarded at will.").
Here, defendants have not terminated, or been terminated, prematurely, and Big O is not seeking to enforce the post-termination covenant in the Quartz Hill Agreement. Nothing prevents Big O from opening a new store in Quartz Hill. Moreover, Big O has not presented any evidence of any Big O franchisees who have multiple franchise agreements with staggered termination dates, such as defendants, and who have a franchise agreement set to expire during this litigation. While the court in BACH noted that franchisees are a close-knit community and may be "emboldened to follow in Defendants' footsteps," 636 F.Supp.2d at 1249, there is no reason to think that, even if there were any franchisees similarly situated to defendants here, they would be emboldened by this litigation as opposed to the much larger ongoing litigation in California state court.
Big O is not permitted to rely on mere speculation. See RoDa Drilling, 552 F.3d at 1210 ("Purely speculative harm will not suffice, but rather, `[a] plaintiff who can show a significant risk of irreparable harm has demonstrated that the harm is not speculative' and will be held to have satisfied his burden.") (citation omitted). In short, Big O presents no evidence of any specific harm it is actually suffering, but simply identifies categories of harm it could theoretically suffer under a different set of circumstances.
The Court declines to address the remaining preliminary injunction elements, as the resolution of them will have no bearing on the outcome. See In re Qwest Communications International, Inc. Securities Litig., 241 F.Supp.2d 1119, 1123 (D.Colo.2002) (declining to enter temporary restraining order, even "assum[ing], without deciding, that the plaintiffs have a substantial likelihood of success on the merits," because plaintiffs failed to establish irreparable harm and that the balance of equities was in their favor); Russell v. Department of Air Force, 915 F.Supp. 1108, 1122 (D.Colo.1996) ("Having decided that [plaintiff] has not shown clearly that he has a substantial likelihood of success on the merits, I need not address the remaining factors ...."); see also Sofinet v. INS, 188 F.3d 703, 707 (7th Cir.1999) (noting that if a plaintiff fails to meet the "threshold requirements" of showing "likelihood of success and irreparable injury," "the court's inquiry is at an end and the injunction must be denied") (citing Abbott Labs. v. Mead Johnson & Co., 971 F.2d 6, 12 (7th Cir.1992)); cf. Dominion Video Satellite, 356 F.3d at 1266 n. 8 (declining to address other preliminary injunction factors after deciding that the district court's finding of irreparable harm was in error).
After Winter, it is clear that the showing of irreparable harm cannot be lessened in light of a stronger showing on the merits. Although any discussion of the merits would be the Court's "preliminary findings of fact and conclusions of law," and "[o]bviously the findings and conclusions may be different after a trial on the merits," Hartford House Ltd. v. Hallmark Cards Inc., 647 F.Supp. 1533, 1536 (D.Colo.1986), nothing is gained by wading into an analysis that will have no effect even at this preliminary juncture. Cf. McData v. Brocade Communications Systems, Inc., 233 F.Supp.2d 1315, 1320 (D.Colo.2002) (stating, in a patent case, that "[w]hen these
Finally, plaintiff has identified nothing about the balance of the equities or the public interest that would alter the conclusion reached here.
For the foregoing reasons, it is
